What caused the stock market crash of 1929?

In layman’s terms, please.

Briefly, there was a speculative bubble in stocks and the bubble burst.

The recent housing bubble was similar: people invested in it, thinking the value would continue to go up, until things were overvalued. At which point, people started selling and everything crashed.

Yeah, lot’s of arguments about the events before and after the crash. But universal agreement that the country was capitalized with borrowed money. Like a Ponzi scheme, any small set back and lack of new investment makes it all fall apart. Just like the recent housing bubble.

Wasn’t the crash itself (not the rest of it, but the initial selling) triggered by news that the states and the federal government was considering greater regulation of public utilities, thereby driving down the price of utilities stocks?

Could you cite that? It could be true, but it also sounds like a republican/conservative fantasy.

Exactly right. Paper with no value based on other paper with no value only works until there is the slightest glitch, and then the entire house of cards comes tumbling down. It was rampant speculation fueled by unregulated Wall Street types, just like the most recent disaster.

The immediate cause was margin buying. Buying on margin meant that you put up a fraction, a margin, of the stock’s price and borrowed the rest on short-term speculative buys. Margins got down to 10%. As with any bubble, that worked fine as long as prices kept going up. As soon as prices fell, however, your stockbroker legally had to cover the shortfall.

Say you bought RCA, the Google of the day. You put in an order for it at $500. You put down $50 of your own money. If it went up to $550, you sold. You paid off the $450 you borrowed and kept $100, making a 100% profit.

But what if it went down to $400? You’re out your entire $50. Worse, the person you borrowed from still wants $450. You have $400 from the sale of the stock, so you now have to find another $50 in your pocket. If you’re a speculator, though, you’re putting all your money into stocks and you’re cash poor. So your broker sells anything you have in your portfolio to raise the cash. Since that’s going down too, in no time at all you’re wiped out and probably owe money on top. (You’re paying fees for every transaction and loan.)

The Wiki link summarizes how prevalent this was.

That’s why a bubble is called a bubble. There’s no possible gradual downturn. Prick the bubble and it explodes into nothingness.

Also don’t forget banks were not guaranteed. If the bank failed you were out your money, the government didn’t insure deposits at the time. This lead to people panicking to get their money out, well in some cases.

One important thing to remember is the farmers were already in a depression for several years already. This wasn’t effecting the urban areas yet.

From* Gilligan’s Island*

One thing to remember was that there were some warnings. The Dow had suffered a slight reverse in May, then recovered and reached its peak in September. Then it dropped sharply, but had one more rally before Black Tuesday.

Here’s a claim that the Federal Reserve Board burst the bubble by raising interest rates, which made it harder to borrow to buy stocks. I’m not sure I buy the argument, but there’s one possibility.

Here’s a study that shows real estate prices peaked and crashed at the same time as the stock market. The authors don’t claim anything other than coincidence.

If you’re asking what caused the Crash in general, the previous posters have answered that pretty well. If you’re asking what triggered the events of October 24-29 specifically, I don’t think anyone can point to a single trigger.

You’re confusing the stock market crash with the Great Depression. They’re different things. Banks did not fail in large numbers after the crash. The number of failures started rising in 1930 but the greatest number happened in 1933 when they never reopened after the bank holiday declared by Roosevelt when he took office.

The Crash did not cause the Depression. The Depression has a host of causes, some of which came because of failed economic policy responses to the Crash, but they’re two separate events.

So was it inevitable? I don’t mean with different trading / lending rules, I mean with the markets as they were, was there no way there could have been a gradual readjustment?

Thanks for mentioning that. I think the Crash was an easily identifiable event people use to mark the beginning of the GD, and WWII as another easily identifiable event to mark the end, but the beginning and end are both complex circumstances that can’t be easily defined with a single date and/or event.

It could be a matter of semantics, as in if the readjustment was gradual then there wasn’t really a bubble. There is no technical definition of a bubble. It’s a convenient shorthand.

But historically bubbles bust. Always.

(And the next question is, so why do we always keep falling for them? The shorthand answer is that people are always greedy and shortsided. If you as a financial firm stay out or drop out of a rapidly rising market, people will go elsewhere and you will fail before the rest of the world does. Short-term stupidity is rational because people won’t punish you more if you fail when everybody else does. And greed is contagious.)

Well, here’s an article by Harold Bierman that suggests it:


I forget the name of the economist who recently said, “The four most dangerous words in the English language are, ‘This time it’s different!’”

Thanks, this is interesting stuff. It’s going to take me time to digest it all, but it suggests a Public Utility Bubble with inflated stock prices, and the regulation was a threat to end a Ponzi scheme by the utilities. And many other factors, which is why this interesting, and better than the typical article which picks a single cause and tries to portray that as the single factor.

Rather a paraphrase of the line from Dead Again: “This is fate we’re talking about, and if fate works at all, it works because people think that THIS TIME, it isn’t going to happen!”

It’s not entirely true that people don’t know a bubble when its happening. Look at the Internet bubble of the 90s. Everyone knew it was a bubble, that stocks were overvalued and that many Internet stocks were purely speculative. But the problem was that if you ignored Internet stocks, your returns were weaker than if you bought them. The hope was that you’d recognize it bursting and be able to get out, and that was one reason it was a relatively minor disruption.

The housing bubble, OTOH . . .

Actually, the whole financial structure of the USA was pretty weak in the 1920’s-rural banks would fail regularly, and bank runs were common.
There was no easy way for the Federal Government to intervene (to prop up failing banks).
Then add the speculation in the stock market-with banks lending on margin-a recipe for disaster.
One story I’ve heard that the famous financier (Bernard Baruch) was getting a cab ride, and the driver offered him a stock market tip.
Baruch figured that if a cabdriver was speculatingm it was time to get out of the market.